Japanese Economy Heats Up In 1Q

TOKYO (AP) -- Japan's economic engine accelerated in the first quarter, with red hot growth in China spurring a broadening recovery.

Real gross domestic product grew at an annual pace of 4.9 percent in the January-March period, the government said Thursday. The figure marks the fourth straight quarter of expansion but misses Kyodo news agency's average market forecast for annualized growth of 5.6 percent.

Still, the results are solid and reflect how the country is benefiting from a surging Asia and China, which is poised to overtake Japan as the world's No. 2 economy sometime this year. The robust export demand has given Japanese companies the confidence to raise factory output and plan for bigger capital investments.

The difference this time, economists say, is that the recovery is finally starting to reach workers and households.

Exports accounted for more than 90 percent of Japan's economic growth in the previous three quarters, said Takuji Okubo, chief economist at Societe Generale in Tokyo. But growth in the first quarter stemmed more equally from both exports and domestic demand.

"The Japanese economy had been flying on a single engine," he said. "The Japanese economy in 2010 seems to have started to have more engines to support growth."

On a quarterly basis, GDP -- or the total value of the nation's goods and services -- grew 1.2 percent from the October-December period.

In its semiannual outlook report last month, the central bank predicted a brighter future for Japan this year after the economy shrank a record 5.2 percent in 2009. It credited exports for fueling production, stock market gains and improving corporate profits. That should eventually lead to more jobs, higher wages and stronger consumption at home, it said.

Japanese companies across the board are reporting big improvements in their annual earnings reports so far, led by big-name exporters like Sony Corp. as well as banks like Mitsubishi UFJ Financial Group Inc. Earlier this month, Toshiba Corp. said it aimed to quadruple profits and invest $14 billion over the next three years to bolster its strengths in semiconductors and nuclear power.

In the January-March period, exports jumped 6.9 percent from the previous quarter, according to the Cabinet Office's preliminary report. Consumer spending, which accounts for roughly 60 percent of GDP, rose 0.3 percent, while corporate investments increased 1 percent.

"Gradually, the economy is looking more self-sustaining," said Hiroshi Shiraishi, a Tokyo-based economist for BNP Paribas. "It's still export-driven, but you can see the recovery moving on to the next stage."

He added that Japan's economy is recovering faster than the U.S. and Europe. Its proximity to Asia has helped, and Japan is not burdened with debt-laden balance sheets in the private sector, he said.

The encouraging numbers should offer the Bank of Japan some respite from recent political pressure to do more to help the economy. The policy board began a two-day meeting Thursday.

Speaking to reporters after the GDP release, Japanese Finance Minister Naoto Kan said he expects the current recovery to continue but warned of ongoing risks including mild deflation and market volatility, according to Kyodo.

Japanese consumer prices fell for 13th straight month in March, though the GDP data suggests that deflationary pressures are starting to ease.

Deflation, which plagued Japan during its "Lost Decade" in the 1990s, can hamper economic growth by depressing company profits, sparking wage cuts and causing consumers to postpone purchases. It also can increase debt burdens.

Moreover, Japan could face fallout from Europe's debt crisis if it's not contained, economists say. While a direct impact is unlikely, Europe's problems might lower global growth expectations, which would hurt business and consumer sentiment before hitting actual export levels, said Masamichi Adachi, senior economist at JPMorgan Securities Japan, in a note to clients.

Japan's economy is expected to slow in the months ahead, regardless of how the European crisis unfolds. Export demand will most likely moderate, resulting in growth of around 3 percent, economists say.

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